Foreclosure Has Consequences with Uncle Sam

With tax season upon us, many homeowners are confronted with the reality that they may have to pay taxes for some of the mortgage debt that was forgiven during a foreclosure. A recent report discusses this unfortunate trend.

As reported by, it is IRS policy to tax forgiven debt you are personally responsible for as if it is income. Say, for example, your credit card company settled a $10,000 debt for 50 cents on the dollar. You’d have a debt forgiveness of $5,000, which the IRS would count as income, just like your wages.

The same policy held true for most mortgage debt until 2007, when Congress passed the Mortgage Forgiveness Debt Act. That ended the liability for many homeowners — but not all.

In general, if you lose your home to foreclosure or short sale, where you sell your home for less than you owe, the IRS won’t add insult to injury by counting the difference as income. At least until 2012.

However, there are four major exceptions to the rule:

1. You did a cash-out refinance and splurged.
2. You have a home-equity line of credit.
3. You lost your vacation home or investment property.
4. You owned a multi-million-dollar home.

Please contact our office today to discuss foreclosure related issues with you in greater detail. You can reach us by calling us at 305-263-7700.